Investable indices tend to recursively underperform their non-investable versions. In light of recent events, we can wonder whether the liquidity crisis that occurred in the wake of the Lehman collapse and had a significant impact on the performance of hedge fund strategies (more particularly on the strategies that are exposed to credit risk) has increased this excess return or not. In this respect, it would be interesting to compare the excess returns of non-investable indices and those of their investable counterparts before and after 2008. More...

Lionel Martellini, Mathieu Vaissié, Felix Goltz Following a growing concern among investors about the quality of hedge fund index return data, and given the lack of capacity and transparency specific to that industry, this paper questions from an academic perspective whether it is feasible or not to design hedge fund benchmarks satisfying all defining properties for a good index. In particular, in an attempt to test whether achieving investability necessarily comes at the cost of representatitivity, as sometimes claimed by hedge fund index providers, we borrow from the asset pricing literature the concept of factor replicating portfolios and apply it to the benchmarking of hedge fund style returns. A revisited version of this paper was published in the March 2007 issue of European Financial Management.More...

N. Amenc, L. Martellini, M. Vaissié. As a response to the needs of investors, the Edhec Risk and Asset Management Research Centre proposes an
original solution by constructing an “index of indexes”, the performance of which is posted on a dedicated web site
(www.edhec-risk.com). The aim of the methodology used to construct this “index of indexes” is to construct a
benchmark with degrees of representativity and stability that are significantly higher than those of the indexes
available on the market. This methodology was first introduced in Amenc, Martellini (2002a). The statistical
process leading to the construction of the “index of indexes” (i.e., the Edhec Alternative Indexes) gives them
interesting portfolio properties. These indexes improve the soundness of the strategic allocation process and
they can be replicated more easily. Hence, the Edhec Alternative Indexes are ideal candidates to help investors
to allocate a significant part of their portfolio to the alternative class. More...

M. Vaissié. The aim of this document is to provide a detailed presentation of the different hedge fund indices in order to
highlight their strengths and weaknesses. To analyse the reasons for the heterogeneity of their performances, we
will focus on the following five points: Transparency & Independence, Accuracy of the data and punctuality, Stability, Representativity, Purity.
The first three points will allow us to provide details on the index construction methods. The following two points will allow us to understand the consequences of the
heterogeneity of the construction methods in terms of representativity and purity. We will thus be able to reply to
the following question: are all hedge funds created equal?
More...

David E. Kuenzi When investment managers construct strategy benchmarks and manage their portfolios against them, they are making an implicit bet that some subset of the broader investment universe will produce better risk and return characteristics than a similar published index over the long term. Despite the long-term focus of this decision, it is nonetheless active in nature. Strategy benchmark performance should thus be evaluated as a source of manager value-added. More...

Different hedge fund indexes available on the market are constructed from different data, according to diverse selection criteria and methods of construction, and they evolve at differing paces. As a result of this heterogeneity, investors cannot rely on competing hedge fund indexes to obtain a “true and fair” view of hedge fund performance. Investors are therefore at a loss when selecting benchmarks. As a response to the needs of investors, the Edhec Risk and Asset Management Research Center proposes an original solution by constructing an “index of indexes.” The aim of the methodology used to construct this “index of indexes” is to construct a benchmark with degrees of representativity and stability that are significantly higher than those of the indexes available on the market. More...

Noël Amenc, Lionel Martellini.
The fact that hedge funds have started to gain widespread acceptance while remaining a somewhat mysterious asset class enhances the need for better measurement and benchmarking of their performance. One serious problem is that existing hedge fund indices provide a somewhat confusing picture of the investment universe. In this paper, we first present detailed evidence of strong heterogeneity in the information conveyed by competing indices. We also attempt to provide remedies to the problem and suggest various methodologies designed to help build a “pure style index”, or “index of the indices” for a given style. More...